Vendor Managed Inventory (VMI)

A supplier who runs your replenishment depends on one thing it cannot check: your own stock figures. Under vendor managed inventory (VMI), the buyer supplies the counts, the consumption (units used) and the limits. When a VMI arrangement goes wrong, the cause is usually a number that was shared late, was wrong, or had no rule behind it.

That makes VMI a buyer-side discipline before it is a supplier service. Large retailers such as Walmart and Procter & Gamble made it well known, but the same logic applies to a factory buying cartons or a distributor buying packaging. Who owns the stock and who bears the risk also change with the model, so those are settled in writing too.

This page defines the term, works through a minimum and maximum example, and gives a six-test checklist to pass before the first delivery. Each test has a clear pass and a clear fail, so you know where you stand.

The buyer shares inventory data and the supplier replenishes against it.

The data shared typically covers sales records, stock withdrawals, production schedules, inventory levels, goods in transit, back orders, incoming orders and returns, usually updated weekly. Who sets the limits is a separate choice: enterprise systems let the buyer fix the minimum and maximum, or let the supplier manage them (Oracle's VMI documentation, release 25c). The buyer keeping the limits is the recommended choice.

The minimum is the stock that covers demand during the supplier's lead time plus safety stock. The maximum adds demand over one review period. Lead time is the days from order to receipt, safety stock is extra stock held against uncertainty, and the review period is the days between stock checks.

Minimum and maximum levels built from their inputs

The worked example is a model and not an official figure. At each weekly review, the supplier orders up to the maximum, which acts as an order-up-to level. If reviews are continuous or daily, the minimum serves as the reorder trigger.

For the inputs, see the guides to the reorder point formula and safety stock calculation.

VMI does not fix who owns the stock. Under a standard purchase the buyer owns it from delivery; under consignment the supplier owns it until the buyer uses or sells it. VMI is about who decides replenishment and consignment is about who owns the stock, so an arrangement can be either or both. Write the model into the agreement, with who bears losses from shrinkage (stock lost to theft, damage or error) and expiry, and whose count wins in a dispute.

For GST (Goods and Services Tax), one rule matters if your stock moves as sale or return. Under section 31(7) of the Central Goods and Services Tax (CGST) Act, 2017, as of October 2026, goods sent on approval for sale or return are invoiced at or before supply, or six months from removal, whichever is earlier. Whether your arrangement is sale or return is a question for your tax adviser.

Six checks decide whether a VMI arrangement is ready: scope, levels, trigger, cadence, ownership and proof. Run each before the first delivery. They are recommendations, built on the formulas above.

Is the scope small and steady enough?

Pass: 2 to 3 items at one site, each with daily demand that varies by less than 20% over 12 weeks (a recommended threshold for "steady"). Fail: the whole catalogue from day one, or any item outside that variation.

Are the minimum and maximum written down with their inputs?

Pass: each item has a written minimum and maximum, with demand, lead time, safety stock and review period behind them. Fail: round numbers nobody can explain.

Does the trigger use available plus expected stock?

Pass: the agreement bases orders on stock on hand, less reserved, plus on order. Fail: the trigger is on-hand stock only.

Is there a named review day and owner?

Pass: a fixed day, weekly to start, and a named owner on each side. Fail: "regular reviews".

Are ownership, losses and disputed counts written down?

Pass: the agreement says who owns the stock, who bears shrinkage, damage and expiry, and whose count wins. Fail: it is silent on any of the four.

Does the stock report match a physical count?

Pass: a dated stock report by warehouse matches a count of 5 items, each within 2% (a recommended sample and tolerance), and each receipt is checked against its order. Fail: the report is never reconciled. Guides to cycle counting and the goods receipt note show how.

Related terms are reorder point, safety stock, lead time, fill rate and the bullwhip effect. The reorder point is the stock level that triggers a new order; the reorder point formula guide shows how to set it. Fill rate is the share of demand met from stock. The bullwhip effect is where small demand changes swell as orders travel up a supply chain.

A dated stock report by warehouse is the shared figure in VMI. Arka Inventory is cloud software built natively on Salesforce, and it shows stock across multiple warehouses, inventory on order and lead-time insights in one view.

With custom reports and dashboards you build the view you agree with your supplier, and our inventory dashboard guide shows what to include. Our inventory alerts flag items approaching or below minimum stock levels. Our Commit Inventory feature handles the reservations behind the "less reserved" part of test 3. You can export your data at any time, in the format you choose or through our API, and send it on the agreed day.